Insider special report: Food & drink

Arbroath smokies being prepared by Iain R Spink on the beach at Auchmithie. Pic: VisitScotland

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Scotland’s food and drink sector has grown rapidly in the last decade to become one of the great Scottish export success stories, though it faces significant challenges which may yet hamper its growth.

Most up-to-date figures show the target set in 2009 to reach £5bn in exports by 2017 was smashed six years early, as was the total target to hit £12.5bn in turnover by 2017.

The Year of Food and Drink Scotland 2015 programme will this year showcase the work of Scotland Food & Drink, a Scottish Government-led umbrella development agency launched in 2007 to create a world-leading support network for the sector.

To date, the public body appears to have served the sector well.

Scotland Food & Drink had to revise upwards both the export value and total turnover targets for 2017 to £7.1bn and £16.5bn respectively as a result of strong growth between 2007 and 2012, largely anchored on whisky, which by 2013 accounted for 80 per cent of Scottish food and drink exports by value.

If those targets are reached Scotland’s food and drink sector will have almost doubled in value terms in a decade.

However, a lot can happen in two years to scupper those revised targets, and the mitigating factors are piling up, including: the strength of sterling; the current supermarket pricing war; eroding margins; input costs set against low wage growth in both home and overseas markets; price deflation; overseas competition; and finding new talent to fill senior roles.

The Scotch whisky industry is now feeling some recessionary pain with the value of exports dipping seven per cent last year to £3.95bn, ending a decade of export growth.

Recent figures published by the Scotch Whisky Association (SWA) for 2014, taken from HM Revenue and Customs data, show export volumes also dipped three per cent in 2014 to 1.19 billion 70cl bottles, which the SWA put down to “weaker economic conditions and political volatility in some markets”.

Eric Galbraith, lead partner in Brodies’ food and drink group, says many of the 30 or so new and artisan whisky distillers which are not afforded the financial backing of a large parent group may struggle to raise financing.

“Funders need to manage their risks. That’s only fair.

“It’s easy then to understand an appetite for working with an established, asset-rich corporate, that presents modest risks.

“So, the issue for most smaller businesses looking for funding is the stage in their life cycle they are at and their compatibility with a funder’s criteria.

“The old model of offering security over assets and directors’ homes is still relevant but its availability is no longer the determining factor for potential funders.”

Rona Dennison, director at Burness Paull, says while whisky exports have plateaued following years of record-breaking growth, reining in production plans at this stage “would be premature”.

“Whisky writer-reviewer Jim Murray may be hailing certain Japanese, US and even English alternatives as being the world’s current top five, but it will take more than his opinion – highly-regarded as it may be – to convince the growing body of new consumers in emerging markets there is any substitute for the provenance of genuine Scotch.

“And, despite the story told by the overall export figures, these new consumers are continuing to grow in number.”

Seafood exports from Scotland have been one of the great export success stories of late, with figures published in April by the Scottish Salmon Producers’ Organisation suggesting the value of exports of Scottish salmon exceeded £500m for the first time last year, and was up £50m on 2013 figures.

Scottish salmon is now not only Scotland’s number one food export, as of 2014 it also became the UK’s biggest food export with more than 160,000 tonnes exported last year to more than 60 countries.

The sector is also one of the largest employers in rural Scotland. Scottish Enterprise estimates seafood consumption in China will treble on 1990 figures to 35.9 kilograms per head by 2020.

Craig Anderson, managing director at The Scottish Salmon Company, says Scotland’s development agencies have played a key role in the the sector’s success overseas.

“Through the Scottish Government, we work closely with Scottish Development International (SDI) and Scotland Food & Drink to develop and grow opportunities abroad,” he says.

“They continue to be key partners and provide a huge amount of international insights, contacts and platforms via the trade shows, allowing us to showcase the brand and our salmon.

“The number of countries we export to rose from 17 in 2013 to 23 in 2014, and exports now make up 43 per cent of our overall revenues.

“By 2016 we predict the volume of exports will represent at least 50 per cent of our total figures due to continued development in Asia and the Far East.”

For others operating in the food and drink sector, access to funding and refinancing could prove troublesome, as Lyn Calder, corporate finance director at Johnston Carmichael, explains.

“The banks tend to have sector specialist teams in place which are aware of this issue when it comes to setting up financing structures.

“There is usually headroom built into any funding plans to help cushion the impact of pricing pressures and most banks and their clients will be prepared for this.

“However, some food and drink businesses which are already highly geared and then encounter significant price squeezes could run into problems.”

Gary MacDonald, corporate partner at DWF, says deals and investment activity in the sector was “strong” last year.

“Iconic brands such as Baxters may now be taking a breath after having completed some chunky acquisitions, and AG Barr’s tie-up with Britvic may have gone flat, but there is no shortage of investors looking to put cash into the right businesses.

“Scottish brands have credibility with investors due to their quality and marketability.

“This should drive future growth for those brands which can deliver strong returns and provide attractive export opportunities.”

One of the biggest issues currently facing our domestic food and drink producers is the trickle down effect of the big supermarket operators’ efforts to stem the loss of market share to the discounters.

As Insider went to press, Tesco revealed one of the largest losses in UK corporate history after taking £7bn in writedowns on the value of its bloated estate.

With all the main supermarket groups now competing with the likes of Lidl and Aldi on price, the effect of this is having a “devastating effect” on producers and suppliers, a recent report from insolvency specialist Begbies Traynor found.

Begbies’ most recent Red Flag analysis for the first quarter of 2015 suggests the number of food and drink manufacturers in ‘significant’ financial distress rose by 94 per cent against the same period a year earlier and this had followed an 113 per cent increase in financial distress recorded in Q4 of 2014.

This price war is also heralding in a real crisis for Scotland’s dairy sector, already knocked down to wafer-thin margins as milk has long been viewed by retailers as a pricing battlefront.

So much so in fact, the Scottish Parliament’s rural affairs committee launched an inquiry in January; convener Rob Gibson said the sector was under threat from “rock-bottom prices”, a structure which has put the industry into steep decline since 2002.

In a written submission to the rural affairs committee, Robert Graham, managing director of Graham’s the Family Daily, described the challenges the dairy industry is facing as “unprecedented”.

Graham has warned the long-term future of the company is dependent upon Stirling Council approving a proposal to build 600 new homes on a 70-acre greenbelt site at Airthrey Green, which will fund a proposed new £20m dairy research facility.

Clive Phillips, a partner in the land & rural business team at Brodies, and himself a working farmer, says the competition for land could see vital farm land taken out of food production.

“There is a constant dynamic between competing land uses, and in particular land for agriculture, development or infrastructure and forestry.

“There is also the added pressure to use land in a sustainable manner and provide environmental benefits, and in some cases renewable energy projects make further demands.

“Very often demand for land for development around the urban fringe or linking towns and cities can take some of the most productive farm land out of production, and the challenge is to maintain and increase yields to meet growing demand for food worldwide.”

Scotland’s food and drink sector is now one of the largest employers by sector, employing north of 130,000 people, though the industry is forecasting a massive skills shortage.

James Chadwick, head of food and beverage at Grant Thornton, says it is important businesses encourage the next generation before this begins to impact on growth.

“I think people can see the sector presenting limited opportunities with businesses lacking dynamism – we need to speak about the opportunities that are available and demonstrate the attractive career prospects for young people.

“There are some great examples of businesses, like Border Biscuits, that have linked up with schools to improve awareness of opportunities in the sector and the value of gaining business skills.

“The budget recently announced support for apprentice schemes but I think there is potential to expand this further to help a key sector like food and drink.

“Also, many businesses in Scotland are based in rural locations which can affect the attractiveness of working in the sector, particularly where travel becomes more difficult or expensive.”

Edinburgh College is actively working in partnership with the food and drink sector to close the skills gap.

Hugh McCluskey, professional cookery curriculum manager at Edinburgh College, says by working closely with the sector, the college is better able to adjust to the demands of industry to then deliver the building blocks to develop the next generation of new talent.

“The key to inspiring the future talent and leaders into Scotland’s thriving food and drink sector is to get more young people interested at an early age.

“We are actively doing that through the South East Scotland Academies Partnership and partnership working with a number of local schools to give school age children – from S4 to S6 – a taste for the opportunities through engaging them in experiencing the reality of a career in this area.

“As well as giving them the chance to get a qualification it seeks to widen their horizons to the potential in this industry.”

The Royal Highland Education Trust (RHET), the educational charity of the Royal Highland and Agricultural Society of Scotland, agrees the sector needs to generate career interest from a young age.

RHET education manager Katrina Barclay says: “We offer free learning opportunities to young people in Scotland to allow them to interact directly with people working in the food, farming and countryside environment.

“Talking directly to the pupils is a great way to showcase all the industry has to offer.

“We attend industry events such as Grass Tech, learning festivals and host our own on-farm and in-school events which are run by people directly involved in the food and farming sector and with partners such as SRUC, Lantra and the Scottish Food and Drink Federation to highlight the skills needed to fill positions.

“During the Royal Highland Show in June we will be running a careers ‘speed networking’ session for secondary pupils to interview people from foresters and dairy farmers to dieticians and chefs on what their job is like in the hope we encourage young people to consider their future in the agriculture and food and drink sectors.”